Insurance forms that make no sense. Subscriptions that can’t be cancelled. A never-ending blizzard of automated notifications. Where does all this sludge come from — and how much is it costing us? (Part one of a two-part series.) SOURCES:Benjamin Handel, professor of economics at UC Berkeley.Neale Mahoney, professor of economics at Stanford University.Richard Thaler, professor of economics at The University of Chicago. RESOURCES:"Selling Subscriptions," by Liran Einav, Ben Klopack, and Neale Mahoney (Stanford University, 2023)."The ‘Enshittification’ of TikTok," by Cory Doctorow (WIRED, 2023)."Dominated Options in Health Insurance Plans," by Chenyuan Liu and Justin Sydnor (American Economic Journal: Economic Policy, 2022).Nudge (The Final Edition), by Richard Thaler and Cass Sunstein (2021)."Frictions or Mental Gaps: What’s Behind the Information We (Don’t) Use and When Do We Care?" by Benjamin Handel and Joshua Schwartzstein (Journal of Economic Perspectives, 2018)."Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts," by Benjamin Handel (National Bureau of Economic Research, 2011). EXTRAS:"People Aren’t Dumb. The World Is Hard. (Update)" by Freakonomics Radio (2024)."All You Need is Nudge," by Freakonomics Radio (2021)."How to Fix the Hot Mess of U.S. Healthcare," by Freakonomics Radio (2021)."Should We Really Behave Like Economists Say We Do?" by Freakonomics Radio (2015).
Chapter 1: What is sludge and why is it everywhere?
I have a story to tell you, and I'm curious if anything like this has ever happened to you. I recently got a letter from the Department of Motor Vehicles saying it's time to renew my driver's license. This is a letter that no one looks forward to receiving. In many places, the DMV is famously hard to deal with. Long lines, confusing protocols, et cetera, et cetera.
But as I read the letter, I see there is a loophole that if you are a member of AAA, the American Automobile Association, which I happen to be, then you can renew your license at their office. And even better, you can set up an appointment ahead of time. That was exciting.
So I made my appointment online, put it in my calendar, got all my documents together, and I showed up on the right day, the right time, and found, to my surprise, a long line of people waiting for what looked to be just two or three clerks. I asked a couple people online what time their appointments were for, and they said they didn't have appointments. They had just walked in.
And so I, being an optimist, I thought maybe there's a separate line for appointments. So I asked around and one helpful AAA employee told me that, no, the line is the line, is how he put it. And how long do you think that line will take? I asked. Oh, probably just two hours, maybe three, he said.
I had pictured myself buzzing in with my appointment being done in 15 minutes, maybe 30, even an hour would have been okay, but two hours or three, that I could not swing. So the next time you hear about a guy being arrested for driving with an expired license, that will be me.
What happened at AAA surprised me, especially because after I'd made my appointment, I received a couple emails confirming it and asking me to let them know if I'd be late. So I really thought I had an appointment, the way the word is commonly used. But I realize now that their definition and mine were not the same.
Either that or I had simply run into a situation where a seemingly simple thing is made complicated or slow or frustrating. Has this sort of thing ever happened to you? Of course it has. It happens all the time, and it comes in many flavors. For instance, when it takes 30 seconds to sign up for some subscription service and then forever to cancel it.
Or when you fill out some massive government form online, but that one data field won't accept your answer, and when you try to hit submit, the whole thing freezes. Or when your insurance company sends you a menu of health care plans and you literally cannot understand the difference between the options or how much they will actually cost. There is a word for this kind of thing.
This is my example of sludge.
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Chapter 2: Why do simple tasks become complicated?
No, I've spent $25 on a burrito bowl, which is going to be delicious, but it's too much to spend on a burrito bowl.
Richard Thaler likes to talk about what he calls the curse of knowledge, this idea that when you're the firm making some interface or product or service for you consumers, you know how everything works and it doesn't seem that complicated. Whereas if you're coming at it from the outside, it's a different picture. How much credit do you give that theory?
My sense is a lot of this arises due to A-B testing. In the online setting, they're just experimenting with things. What happens if I change this font? What happens if I move this button to a different part of the website? What happens if when you're trying to cancel, I put another screen that first gives people some discounted offer? And through that process,
They're basically rediscovering behavioral economics. I don't blame firms for A-B testing and doing what maximizes their revenue. I think it's on policymakers to put in place safeguards so that optimization leads to better functioning markets, to more surplus for consumers, not to this sort of behavior, which makes markets worse and nickels and dimes us.
So one more thing, Neil, do you think that maybe sludge has peaked?
Have we hit peak sludge? Will we look back in time and say December 2024 was peak sludge when the tide of sludge turned? I don't know. I hope so. I am fighting the good fight. And the signals I see are encouraging. But that is not a reason to, what's the poetic way to say this, to lessen our resolve.
Okay, we will not lessen our resolve either. Next week, in part two of this sludge series, we look for solutions. I'd like to thank our guests today, Richard Thaler, Ben Handel, and Neil Mahoney. Although, between you and me, that's not how we say Mahoney's name around here.
When we were preparing to interview him, we kept misspelling his last name in our internal emails, so we came up with a mnemonic device to remember. M-A, as in Massachusetts, where Mahoney grew up, and then H-O-N-E-Y, Honey. And that's why Neil Mahoney is known around here as Massachusetts Honey Boy. I hope he doesn't mind. You don't even want to know what we call Richard Thaler.
Anyway, thanks to all of them. And special thanks to all our listeners who sent in their sludge tape. If you want to hear more about healthcare sludge, check out an episode we made a while back, number 456, called How to Fix the Hot Mess of U.S. Healthcare. And we will be back next week with Sludge Part 2. Until then, take care of yourself. And if you can, someone else too.
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